Government Shutdown Looms As Next Market Headwind
Friday was a nasty close.
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Our View
Next up? Avoiding a government shutdown ahead of the Oct. 1 deadline. I was going to write about the end of September stats and a possible walk away trade, but right now there is something completely ludicrous going on.
Late last week there was a total collapse of efforts to pass a government spending bill.
I know we go through this all the time and it always passes at the eleventh hour, but there is so much extremism on both sides of the aisle. One of these times it won’t pass and there will be a shutdown. The nearly 4 million Americans who are federal employees will feel the effect immediately. Essential workers will remain on the job, but others will be furloughed until the shutdown is over — and none will be paid during the impasse.
Fitch cited a decline in “governance” as a key reason for its downgrade earlier this year, a reference to the repeated battles in Washington over the past two decades that have led to government shutdowns or even taken the government to the brink of a debt default. I doubt this is something that most don’t already know, but should this occur it will have very negative economic consequences and be another big problem for stocks.
All this while the Writers Guild (WGA) and the United Auto Workers (UAW) are striking — although the WGA seems to have come to a deal.
To conclude, aside from the end of the third quarter, there are a lot of moving parts this week and my guess is it’s not going to be good for the S&P.
Our Lean
If there was ever a bad close it was Friday. In the last five days, the MrTopStep imbalance meter has sold over $13 billion.
Our Lean is for more downside this week, so look to sell any 20 to 40-point pops in the ES. We could see some upside this morning, but I’m going to keep my eye on the ball, looking for a down week.
There are some basic patterns that generally show up after the ES closes on the lows. The first is that it usually rallies on Globex. The other pattern is that the ES tends to rally early in the day and early in the week.
Another part of this is, according to the Stock Trader’s Almanac, the end of September is prone to weakness and the last trading day in September or the end of Q3 has the ES down 16 of the last 25 occasions. Further, Oct 2nd — the first trading day of October this year — has been down 9 out of the last 17 (and was down 2.4% in 2011).
As for levels, I’m watching these marks on the upside: 4374, 4382-84, 4390, 4398, 4407 and 4417.
On the downside, keep an eye on 4357 (last week’s low), 4350, 4333, 4320, 4308-10, 4300 and 4290.
MiM and Daily Recap
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The ES traded up to 4390.75 and opened Friday’s regular session at 4382.25, traded up to 4387.50 and then sold off down to 4374.25 at 9:55. From there, the ES rallied up to a new high at 4389, pulled back to the 4378 level at 10:15 then stutter-stepped up to the session high at 4399 at 11:41. It was rejected from this area and traded down to the VWAP at 4384.25 at 12:07, made a lower high at 4395.75, and then sold off 29.50 points down to 4369.50.
From there, it rallied up to 4377 at 2:00 then sold off down to a 4362.75 double bottom at 2:46 and took off to the upside, traded 4386.50 at 3:12 as the early imbalance showed $606 million to sell, pulled back a few points then traded 4390 at 3:24. After the high, the ES ‘collapsed’ and in one bar sold off down to 4366.50, traded up to 4370.75 at 3:46 and traded 4363.50 as the 3:50 imbalance showed over $5 billion to sell. It traded 4360.50 on the 4:00 cash close and went out at 4362.75 at the 5:00 futures close, down 9.25 points or -0.21%. The NQ closed up 0.09% at 14,876.25 on the 5:00 futures close.
In the end, all the rallies were short-covering. In terms of the ES’s overall tone, the late-day selloff was not very friendly. In terms of the ES’s overall trade, volume was on the high side: 292k traded on Globex and 1.361 million traded on the day session for a total of 1.653 million.
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Technical Edge
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NYSE Breadth: 44% Upside Volume
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Nasdaq Breadth: 45% Upside Volume
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Advance/Decline: 47% Advance
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VIX: ~$18 (one-month high)
ES
The ES has fallen in five of the last six sessions, shedding over 200 points in the process. The lone “up” day was a meager bounce, with the ES gaining just a few points.
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Upside Levels: 4374, 4382-84, 4390, 4398, 4407 and 4417
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Downside levels: 4350, 4333, 4320, 4308-10, 4300 and 4290
NQ
While the ES has lost last month’s low, the NQ is clinging to it now. Let’s see if it can hold the 14,800 area. A rebound higher could put 15,000+ in play.
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Upside Levels: 14,950, 15,000, 15,130-150
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Downside Levels: 14,750-800, 14,630-650
Open Positions
Bold are the trades with recent updates.
Italics show means the trade is closed.
Any positions that get down to ¼ or less (AKA runners) are removed from the list below and left up to you to manage. My only suggestion would be break-even (B/E) or better stops.
** = previously mentioned trade setup we are stalking.
Down to Runners in GE, CAH, LLY, ABBV, AAPL, MCD & BRK.B. Now Add META, AVGO, UBER, CRM, AMZN, CVS, AMD, TLT and YM.
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JPM — Many are long from $143-145. This is a longer term swing. Trimmed $153s, then $157.50+ on 7/24.
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Down to ½ position vs. Break-even stop. Can make small, ~10% position trim if we see $160+
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If worried about a larger correction, can sell/trim north of $150
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XOM — Long from the monthly-up area at $108.50 — Trimmed ¼ at $112.50+ and ¼ at $115+. Now we have another ¼ peeled off at ~$118. If we see ~$120, can consider a final exit or hold for a longer-term swing. Up to you.
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Break-even or better stops
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Economic Calendar
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Disclaimer: Charts and analysis are for discussion and education purposes only. I am not a financial advisor, do not give financial advice and am not recommending the buying or selling of any security.
Remember: Not all setups will trigger. Not all setups will be profitable. Not all setups should be taken. These are simply the setups that I have put together for years on my own and what I watch as part of my own “game plan” coming into each day. Good luck!
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